Information-related Problems

But in a free market economy, particularly a modern, complex free market economy, firms and consumers are not likely to be well informed about the consequences of all their decisions.

Governments have long recognized a need to protect poorly informed consumers from actions they would regret. Laws against fraud (мошенничество) have been around for centuries. Modern governments generally regulate working conditions, inspect and grade foods, regulate the design and safety of consumer products, and require that certain products (such as foods and dangerous chemicals) have informative labels.

Monopoly and Market Power

A monopolist is the single seller of a good or service. Because they are the only sellers, they have no fear of being undercut by competitors — and consumers end up paying more than they should.

Some monopolies are almost unavoidable. Most public utilities (gas and electricity, for example) are potential monopolies. The government can regulate such companies by controlling the prices they are allowed to charge.

Government intervention to limit market power, for instance by preventing firms with market power from charging high prices, can improve the allocation of resources.

Income Redistribution and Merit Goods

government may want to intervene to affect the distribution of income, by taxing some and giving to others. But when the government intervenes to affect the income distribution, it makes some people better off by making others worse off. Governments are concerned not just with the distribution of income, but also with the consumption of particular goods and services.

Merit goods are goods that society thinks people should consume or receive, no matter what their incomes are. Merit goods typically include health, education, shelter, and food.

Society's concern over merit goods is closely related to its concern over the distribution of income. Some of the goods provided by the government (such as health and education) are merit goods.

The most difficult question that has to be answered in discussing both merit goods and the distribution of income is how society or the government decides who should get what

10. Describe the main functions of money.

Money is defined as anything that is generally accepted in payment for goods and services or in repayment of debts.

From the earliest times gold and silver, copper, have been the most popular forms of money. But they were not the only forms. As you read through history, you will discover societies that favored things such as tobacco, fish hooks, shells and, of course, various forms of paper for their money.

The material of money should require the following qualities:

• Stability. The value of money should be more or less the same today as tomorrow. In societies where the value of money fluctuates (goes up and down) people will held it in the hope that its value will increase, or spend it immediately thinking it will be worth less tomorrow.

• Portability. Modern money has to be small enough and light enough for people to carry.

• Durability. The material chosen has to have a reasonable life expectancy. For that reason most countries use a very high quality paper for their money.

• Uniformity. Equal denominations of money should have the same value.

• Divisibility is its ability to be divided into parts.

• Recognizability. Money should be easily recognized for what it is and hard to copy.

Functions of money.

The Medium of Exchange

Money, the medium of exchange, is used in one-half of almost all exchange. Workers exchange labor services for money. People buy or sell goods in exchange for money. We accept money not to consume it directly but because it can subsequently be used to buy things we do wish to consume. Money is the medium through which people exchange goods and services.

A barter economy has no medium of exchange. Goods are traded directly or swapped for other goods. In a barter economy, the seller and the buyer each must want something the other has to offer. Each person is simultaneously a seller and a buyer. There has to be a double coincidence of wants.

Trading is very expensive in a barter economy. People must spend a lot of time and effort finding others with whom they can make mutually satisfactory swaps. Since time and effort are scarce resources, a barter economy is wasteful. The use of money - any commodity generally accepted in payment for goods, services, and debts – makes the trading process simpler and more efficient.

The unit of account is the unit in which prices are quoted and accounts are kept.

Money is a store of value because it can be used to make purchases in the future. To be accepted in exchange, money has to be a store of value. Nobody would accept money as payment for goods supplied today if the money was going to be worthless when they tried to buy goods with it tomorrow. But money is neither the only nor necessarily the best store of value. Houses, stamp collections, and interest-bearing bank accounts all serve as stores of value. Since money pays no interest and its real purchasing power is eroded by inflation, there are almost certainly better ways to store value.

Finally, money serves as a standard of deferred payment. When you borrow, the amount to be repaid next year is measured in pounds sterling.